How RIA lenders are adjusting to the health crisis and market crash
The spread of the coronavirus and ensuing market volatility doesn’t seem to be curbing advisors’ appetite for loan financing for mergers and acquisitions. But how do banks feel about lending to RIAs in the current environment?
Mike McGinley, executive vice president of small business banking at Live Oak Bank, said the North Carolina lender still views the investment advisory space favorably.
‘We are still approving loans and are still bullish on the industry,’ he said. ‘We recognize that this is going to be an opportunity for a lot of advisors, and that many advisors are in a good position compared to other industries that may be hit a little bit harder by this.’
As of Wednesday afternoon, McGinley said the bank had closed three loans for advisors this week and was expecting to close more before the week was out.
‘It’s a great industry to lend to in terms of risk,’ McGinley said. ‘There’s recurring revenue, so we love that. It’s really less about whether we want to lend to the industry and more about what valuations would look like in a prolonged downturn.’
He said if a deal is being priced at revenue levels and assets under management before the market drop, the bank wants to ensure that there’s either protections built in for the buyer, or that they’re talking about what the valuation could look like three to six months from now.
McGinley said the Federal Reserve’s recent decision to slash interest rates to near zero shouldn’t have a large impact on lending this time around.
‘It’s not like what you would have seen in the credit crisis, where capital was pretty much depleted and it was really tough for banks to continue lending,’ he said. ‘Banks are going to continue to lend in this environment, as long as it’s an industry that makes sense and they can wrap their heads around the risks associated with the current health crisis.’
Similarly, Scott Wetzel, chief executive of correspondent lending firm SkyView Partners, said this is not shaping up to be the downturn experienced in the wake of the global financial crisis, when M&A deals in the RIA space in 2009 were roughly half of what they were in 2008.
Wetzel’s Minnesota-based firm essentially matches RIAs with a network of banks willing to give advisors traditional loans for M&A activity and succession planning.
‘We saw activity slightly tail off at the beginning of this market decline, which would appear to be intuitive, as advisors are spending a lot more time assuaging customer concerns and probably thinking less about M&A or refinancing,’ he said. ‘But that changed quite markedly last week.’
SkyView’s average weekly volume last year was around $9m in loan applications a week. Last week, the firm saw $26.2m in loan applications, nearly a three-fold increase.
‘We had nine applicants come in last Friday alone,’ Wetzel said. ‘It’s not like we’re running any crazy marketing campaigns.’
McGinley said he’d expect to see at least a short-term pause in demand for acquisitions in the event of a more prolonged downturn, mostly so buyers could wrap their heads around valuation and make sure they’re not overpaying. Sellers, in the meantime, are going to want to make sure that their value doesn’t drop and that they don’t take too low of a purchase price.
‘Once the recovery starts to happen, I think we’ll see an uptick, McGinley continued. ‘For some of the sellers who may have been borderline going into this, it might be the push they need to move forward.’
Live Oak Bank has provided about $750m in loans to investment advisory firms since it started lending to the space in 2013.
McGinley said the bank is calling all of its customers, including in the advisory space, to make sure they’re not feeling any stress as it relates to their cash flow position.
‘We’re offering deferrals if they are, but we haven’t had to do that yet,’ he said. ‘I think if the recovery from the downturn is on the quicker side, then we probably won’t have issues like that — but if it’s a sustained recession, then we may see an uptick there.’
Live Oak, a publicly traded company, has seen its shares lose more than half their value over the past month.
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